Where The Book Business Is Humming

Bertelsmann is making a bundle off Old Media in former Soviet bloc countries

May 14, 2007, 12:00 AM EDT

You wouldn't typically expect to find a high-profile executive of a major media company in drab Kharkiv. The gritty city of 1.5 million is the kind of place where local leaders haven't yet gotten around to tearing down statues of Lenin, and outside Ukraine it's best known (if it's known at all) for the Red Army tanks it used to make. But on a sunny April afternoon, Ewald Walgenbach, a member of the executive board of Germany's Bertelsmann, smiles as he watches a battered steam shovel ladle bricks onto a dump truck at a dilapidated factory that's being converted into a distribution center for the company's Family Leisure book club. Above the din, Oleg Shpilman, CEO of the Ukrainian unit, shouts that the new facility will be able to ship 20 million books a year. "What will happen next year when you have 21 million?" Walgenbach replies with a laugh.

Optimism about the printed word is pretty rare these days. In fast-modernizing Ukraine, though, Bertelsmann is enjoying dot-com-like expansion for its book club, a category that's a slow- or no-growth proposition in the U.S. and Western Europe. Family Leisure moved 12 million books last year—everything from cookbooks to local potboilers to Stephen King thrillers—while sales grew 55%, to $50 million. Today, Bertelsmann is Ukraine's biggest bookseller, with 12% of the market. And the operation enjoys profit margins that are triple the 4% global average for similar Bertelsmann units, which include the Book-of-the-Month Club and Literary Guild in the U.S.

Ukraine is the most spectacular example of Bertelsmann's success with book clubs in the former Soviet bloc. And it's proving that with the right mix of marketing and merchandise, there's money to be made even with low-cost goods. The region has well-educated populations hungry for a good read but relatively few bookstores where they can indulge their passion. As a result, Bertelsmann has also become the biggest book publisher in the Czech Republic and has scored big successes in Poland, Russia, and elsewhere.

The book clubs are part of a broader trend of booming print media in the developing world. In India, newspapers are thriving, with Mumbai alone boasting a half-dozen major dailies. Swiss magazine giant Ringier saw 18% sales growth last year from its lifestyle publications in Vietnam. In Argentina, the number of books published has more than doubled since 2002. And emerging markets are also proving lucrative for another Bertelsmann unit, Gruner + Jahr, which is the second-largest magazine publisher in China via a joint venture.

TEXTING THE ORDERS

Bertelsmann's allegiance to Old Media in newer markets is paying off in other ways. In the U.S., its book clubs tend to serve older customers. By contrast, nearly half the Family Leisure Club's 2 million members (in a nation of 47 million) are under 30. The secret: The Bertelsmann club recruits hot young Ukrainian authors and serves as their exclusive distributor, a smart strategy in a country with only about 300 bookstores. "They're very effective, much more than other publishers," says Ljubko Deresch, an intense 23-year-old who has published five novels—the latest with Bertelsmann—dealing with youthful disenchantment and pop culture.

Keeping prices low is crucial. The average Ukrainian makes less than $8,000 per year, and in Kharkiv, Bertelsmann's main competition is an open-air book market. Dozens of merchants in corrugated metal stalls sell everything from textbooks to science fiction. Family Leisure titles typically go for under $5, competitive with the outdoor market. Then to keep costs down, the club delivers shipments to post offices, where customers claim their books.

No doubt Bertelsmann would like to bottle its Ukraine formula for export to other countries. Although few offer such a favorable mix of book-hungry citizens, cooperative postal authorities, and energetic local management, some innovations from Ukraine can travel. Customers there, for instance, are world leaders in ordering via mobile-phone text messages, a promising e-commerce strategy in poorer countries where few can afford Internet access. Says Shpilman: "Our goal is not to be a book club, but an integrated bookseller."